What? Where? When? and … how much?
The European Bank for Reconstruction and Development, a household name in eastern European privatisations in the earlier part of nearly two decades ago, has a new role to play in Cyprus – helping re-engineer some of the economic sectors that failed to see the sign of the times and did not prepare to the crisis that followed.
That is why veteran economist-banker Libor Krkoska, with 18 years under his belt at various EBRD missions, is now Head of Office in Cyprus, looking into the opportunities that will arise and sifting through the investment proposals for the 600 mln euros the bank plans to invest on the island.
In other countries and primarily in eastern Europe, the EBRD has had an open-ended presence, with ongoing investment and strategies. In Cyprus it is different as the government and the European ‘merchant bank’ have agreed to a six-year time frame, expiring in 2020.
Krkoska has already met with social partners and is confident that by introducing co-financing, Cypriot entrepreneurs will come through, with the main outcome being restructuring, not just of businesses, but even the way of thinking.
“It will be hard, but once it’s done, (Cyprus) will be prepared for the next crisis, whatever it might be,” he told the Financial Mirror in an interview.
“The investment climate is more positive now and the economy is moving in a very good direction,” he added.
“There are a lot of parallels with the situation in Central Europe in the 1990s, where, too, they suffered from a financial crisis, but the banking sector was actually quite strong. Here we have to rebuild it.”
The EBRD usually looks at equity investments, but in Cyprus the focus will be more on transactions, not only equity, co-financing with local banks and the government through structured funds, dealing with chronic issues such as non-performing loans (NPLs) that have plagued local banks, but also the introduction of new financial products.
He said that the EBRD would prefer to “front load” its investments, thus the 600 mln euros that has been pledged so far could be evenly distributed at about 100 mln a year.
“We will see what we can replicate from our East European experience,” Krkoska said, with his primary goal at present being the recruitment of 8-9 local staff of analysts, bankers, accountants, all of whom will be trained to have a better outlook of small to medium sized enterprises (SMEs).
Once the office is fully up and running, some time in November, the focus will be on the corporate sector, sustainable and renewable energy, as well as advisory services to help possibly 40-50 SMEs.
Although the EBRD policy is for equity investments of no more than 20% and for funding of more than 10 mln euros, the Cyprus office will be looking at smaller transactions of 1 mln euros and up, but always looking at promising enterprises with innovative and export-oriented activities.
“The support provided to SMEs will be an important part of our activities, but at the same time your banks and the financial sector need deep restructuring, with the focus being on corporate governance,” Krkoska said.
He said that in the case of the Bank of Cyprus investment, where the EBRD participated in the capital raising by injecting some 120 mln euros for a 5% equity stake, the investment itself was expected, it was the speed with which it concluded that was unexpected.
Three areas that the EBRD will be looking into, running parallel to the government’s roadmap for the privatisation of its state-owned enterprises, are telecoms, energy and the ports concessions. These could occue in the next 2-3 years, he said.
“By investing in the pre-privatisation stage, we will be able to help enhance the restructuring of these companies so that when they are sold the government will get the highest possible price,” Krkoska said, adding that all of these investment will have a level of complication. For example, the telecoms sector will be the easiest, but the energy sector will be the most complicated as “Cyprus needs a better understanding and better regulation of the sector.”
At the same time, he said that it will not businesses that need restructuring.
“Even the labour force will need restructuring, while in everything we do there will be a significant input on environmental issues, as the rest of the EU has set some very high standards in this area.” That is why the EBRD will even be considering investments that result in efficiencies, use of energy saving systems to cut costs and better utilisation of the water resources sector.